Brexit no more than a bump on the road to oil rebalancing: Kemp

Rebalancing the oil market could take slightly longer as a result of the upsurge in uncertainty following Britain’s vote to leave the EU but most traders seem to think it will not slow the process by more than 3-6 months.

All the recent weakness in Brent crude prices has been concentrated in nearby futures contracts while contracts expiring in 2018 and beyond closed at fresh highs yesterday (tmsnrt.rs/294FzeH).

Timespreads, which are one of the key indicators of changing market perceptions about the supply-demand-stocks balance, have been weakening over the last few weeks.

The contango in Brent and WTI futures prices, which had narrowed between late January has been widening since late May or early June (tmsnrt.rs/294MKrv).

The increase in contango, which had been gradual since the start of June, accelerated significantly in the wake of Britain’s vote to leave the EU.

The market is pricing in the need to store a larger volume of crude and products in the near term as market rebalancing is delayed.

Brexit and its negative impact on global oil consumption has coincided with signs some of the large disruptions in oil production could be resolved soon implying greater oil supply.

But the market is anticipating the impact will be fairly modest and push back the rebalancing process by at most half a year or so.

The market is pricing a slightly higher level of stockpiles at the end of 2016 and throughout 2017 as shown by the contango between December 2016 and December 2017 futures prices (tmsnrt.rs/294pC8g).

The biggest impact is seen in the second half of 2016 and the first half of 2017 with little change in stockpiles seen in the second half of 2017 and 2018 (tmsnrt.rs/294MJ6C and tmsnrt.rs/294MGI1).

The overhang of crude and products inventories which built up between the second half of 2014 and the end of 2015 may take slightly longer to clear.

But outside Britain and the EU, oil consumption growth remains very strong while oil production outside OPEC members continues to fall owing to lack of investment.